Euro zone banks could take big hit from inflation income drain, ECB says

Euro zone banks may see a surge in soured loans as rapid inflation and rising interest rates hit household incomes, particularly among the bloc’s poorest, the European Central Bank said in a fresh study on Tuesday.

With inflation rising to double digit territory, households are burning through their savings with little respite in sight as income growth trails far behind, especially for the poorest who are disproportionately hit by surging food and fuel costs.

“The simulated impact on banks’ asset quality from the end of 2022 is material, albeit from historically low non-performing loan (NPL) levels, with a downside estimate of the NPL ratio increasing by 80 basis points,” the ECB in a Financial Stability Review article.

The ratio of non-performing loans stood at 2.35% at the end of the second quarter, suggesting a one-third increase in the worst case.

Banks in Italy, Portugal, Greece and Cyprus could suffer some of the biggest increases in non-performing loans while France, Ireland and Luxembourg could be among the best performers, the ECB’s study showed.

via Reuters